Business insurance should be considered in the context of risk management for each specific business. Risk management will involve an analysis of business risks including in particular risks arising in the area of health and safety at work, as well as risks arising from liability to customers, suppliers and others. Business insurance is one of the essential tools of risk management. Another aspect of risk management is the use of well drafted terms and conditions of business.

The ability of your business to show that clear risk management processes are in place, and even more so a good risk management record, should result in lower insurance costs.

Contact us for advice on iunsurance cover, riusk managment, writing a health and safety policy and drawing up terms and conditions of business.

This section is written mainly from the point of view of owners and managers of SMEs

Legal basis of business insurance

Business insurance is based on a contract between the business and the insurance company. The insurance is therefore governed by the general common law subject to additional special principles developed by the courts including the:

* requirement for an insurable interest;

*
duty of 'uberrimae fidei' (utmost good faith)

Insurable interest

The doctrine of insurable interest requires that someone taking out insurance gains a benefit from the preservation of the subject matter of the insurance or suffers a disadvantage should it be lost.

Statutes requiring policyholders to show a requirement of insurable interest in the
subject matter they were insuring, began to appear from the mid eighteenth
century. the purpose was to distinguish insurance from a mere gamble. It still remains a requirement for many forms of insurance today.

Statutory requirements for insurable interest developed as a result of concerns
about moral hazard and gambling. The requirement for insurable interest for some contracts of insurance is created by statute, but it is usually case law that determines what constitutes a valid insurable interest. Definitions of insurable interest change according to the subject matter of the insurance. In some circumstances policyholders have to
demonstrate strict legal and pecuniary interest in the life or matter insured. In
others this is not necessary.

The insurer rejected a building fire claim. It argued that the claimant was not entitled to recover because it had no insurable interest in the property, as it did not own or have a tenancy over the property, and had not been contractually liable for the preservation of the property and had had no interest in their continuing preservation. It also argued that the claimant had misrepresented or warranted that the property was used for commercial purposes.

The court allowed the claim of the claimant company and rejected the defence of the insurer.

Duty of utmost good faith

Proposal forms and disclosure: the duty of good faith requires the insured (i.e. the business requiring insurance) to disclose to the insurer all matters which may be material to the insurer and his assessment of the risks.

NB: Even if correct answers are given to questions in the proposal form, there is still a risk that the insurers may void the policy when a claim is made if they can successfully argue that the insured failed to disclose a material fact (even if not asked on the proposal form).

The duty of good faith is a continuing one. The strictness of this rule was modified for consumer insurance by thr Consumer Insurance (Disclosure and Representations) Act 2012 but this does not apply to business insurance.

Fraudulent claim: A fraudulent claim may vitiate the entire policy, even if the claimant does have a genuine claim as well as the fraudulent element. Read more.

Risks covered and exclusions

The cover given by the insurance extends only to the precise cover according to the wording of the insurance policy subject to all the conditions and exceptions set out in the policy. The "headlines" of the risks covered in marketing literature, the proposal form and even the policy schedule may give a misleading impression of the extent of the cover.

For example, "public liability" will not usually cover contractual claims or claims by customers for dfective products or services. Building collapse caused by building works by you or a neighbour, or by wear and tear, may not be covered.

Excluded from cover often are loss caused by lack of maintenance, wear and tear, riot and terrorism.

The process of selecting insurance cover requires careful assessment of the risks and potential losses which the business faces. It should not be assumed from the title of the cover or brief description that any particular loss will be covered. It is essential that the policy wording, maximum claims, excess or deductible amounts, conditions and warranties and exclusions should be very carefully considered by risk managers working with insurance brokers to obtain the best cover possible.

Some insurance claims can give rise to very complicated accounting and legal issues. A striking example of such a case is:

A trusted employee of Ted Baker Plc (TB) stole unquantified but considerable amounts of stock over a five year period. In a first High Court hearing which was hotly contested by Axa Insurance and other insurers, the Court ruled that the particular business interruption policy held by TB did cover theft by an employee.

A second hearing, again strongly defended by the insurers, was held in order to determine whether TB could establish that the losses of stock which it has suffered were indeed due to the thefts.

The judge found that: (i) there was no doubt that TB suffered substantial losses arising out of the thefts which were carried out by the employee; (ii) such losses amounted at least to some £2.16 million. The judge also noted that the legal costs incurred by TB were in excess of £2.5 million even before the beginning of the trial. However, for reasons to do with the fact that most of the losses could not definitely be shown to have been due to the theft, the length of time over which the losses occurred and the policy wording, the judge ruled that he had to reject the entire claim by TB.

Reform of insurance law

The Insurance Act 2015 will come into effect on 1 August 2016.

The main provisions of the Act give effect, with some modifications, to the recommendations set out in a joint Report published in July 2014 by the Law Commission and the Scottish Law Commission: ‘Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment’, (Law Com No 353; Scot Law Com No 238).

The Act reforms insurance contract law in the following areas:

* Disclosure and misrepresentation in business and other non-consumer insurance contracts: the Act will replaces the existing duty on non-consumer policyholders to disclose risk information to insurers before entering into an insurance contract. Instead there will be the "duty of fair presentation", requiring policyholders to undertake a reasonable search of information available to them, and defining what a policyholder knows or ought to know. The Act also requires insurers to play a more active role, asking questions in some circumstances. The Act introduces a new system of proportionate remedies where the duty has been breached. This replaces the existing single remedy of avoidance of the contract, except where the policyholder has breached the duty deliberately or recklessly.

* Insurance warranties: under the current law, breach of a warranty in an insurance contract discharges the insurer from liability completely from that point onwards, even if the breach is remedied. The Act abolishes "basis of the contract" clauses, which have the effect of converting pre-contractual information supplied to insurers into warranties. It also provides that the insurer’s liability will be suspended, rather than discharged, in the event of breach, so that the insurer is liable for valid claims which arise after a breach of warranty has been remedied.

* Insurers’ remedies for fraudulent claims: if an insured submits a fraudulent claim, the main remedy in the Act is the one already established by the courts: if a claim is tainted by fraud, the policyholder forfeits the whole claim. The Act also addresses a current area of uncertainty: the insurer may refuse any claim arising after the fraudulent act. However, previous valid claims are unaffected.

* Good faith: the Act removes the remedy of avoidance of the contract for breach of the duty of good faith in section 17 of the 1906 Act, and any equivalent common law rule.

* Contracting out: the Act provides that, as far as it applies to consumer insurance contracts, an insurer will not be able to use a contractual term to put a consumer in a worse position than they would be in under the terms of the Act. For non-consumer insurance, the provisions of the Act are intended to provide default rules and parties are free to agree alternative regimes, provided that the insurer satisfies two transparency requirements.

* Amendments to the Third Parties (Rights against Insurers) Act 2010: the Act also amends the Third Parties (Rights against Insurers) Act 2010 (the 2010 Act), which has not yet been brought into force. These amendments clear the way for the 2010 Act to come into force.

Riot damage

Compensation may be available from the Police Authority for Riot damage.

Conditions and warranties

Insurance policies contain conditions and warranties which must be complied with by the insured.

Examples are a requirement to notify the insurers promptly of any circumstances likely to give rise to a claim, to maintain property, vehicles or machinery strictly in accordance with established maintenance conditions, or to conduct business in accordance with certain processes. Failure to comply may invalidate the policy.

Average clauses and value insured

Some insurance policies, e.g. goods insurance, contain an “average clause” whereby if at the time of the loss the sum insured is less than the value of the property, the insured is to be considered as his own insurer for the difference and must bear a rateable proportion of the loss accordingly.

For example, property worth £100,000 is insured for £50,000. The property is partially damaged by fire and the insured makes a claim for £50,000. The insurer will be entitled to reduce the claim to £25,000 by applying the average clause.

Insurance companies

Insurance business is regulated under the Financial Services and Markets Act 2000 and insurance companies must be authorised by the Financial Services Authority ("FSA”). The FSA maintain the Financial Services Register of authorised firms.

Insurance brokers

Insurance brokers advise customers on the types of insurance available and on the sourcing of insurance. As insurance "intermediaries", insurance brokers must be authorised by the FSA. Authorised insurance intermediaries should therefore appear on the FSA Register.

Except in the case of employee liability insurance (see below), there is no general legal requirement to take out specific insurance.

Road traffic laws require vehicles to be insured against third party liability. The terms of some forms of vehicle purchase finance or leases may require additional or comprehensive insurance.

Certain regulated professions and other regulated businesses (such as some financial service businesses regulated by the FSA) are required to maintain professional indemnity insurance.

Business insurance may also be required in order to qualify as a supplier of government bodies or corporate customers.

Otherwise, business insurance is a matter for the owners or managers of a business, having taken into account the risks to be managed and the cost of available insurance.

Employee Liability insurance:
Employers are legally required to take out employee liability insurance (Employers’ Liability (Compulsory Insurance) Act 1969). This does not apply sole traders or companies with only one employee.

08/07/2013:ABI publishes guidance on insurance for health and safety risks for SMEshttps://www.abi.org.uk/News/News-releases/2013/07/~/media/ECEB3C034EEB4BA1926877F69F3F28AA.ashx
The Association of British Insurers (“ABI”) has produced a guide for SMEs regarding insurance and health and safety risks. The guide explains the distinctive cover provided by Empoyer’s Liablity insurance and Public Liability policies.—this covers businesses for injury, disease or damage to people they do not employ, eg visitors

02/11/2011:
Firm fined for not insuring employees.http://www.hse.gov.uk
A kitchen and bedroom furniture manufacturer from Corby has been fined for failing to insure its employees against liability for injury or disease.

Types of business liability insurance

Business insurance categories to consider are:

Public Liability: public liability insurance covers liability to pay compensation for personal injury or damage to the public, or damage to their property, caused in the course of your business. It will also cover legal fees and other expenses incurred in defending personal injury and possibly other claims. Public liability insurance is usually offered as a package with employee liability insurance.

08/07/2013:ABI publishes guidance on insurance for health and safety risks for SMEs
The Association of British Insurers (“ABI”) has produced a guide for SMEs regarding insurance and health and safety risks. The guide explains the distinctive cover provided by Empoyer’s Liablity insurance and Public Liability policies.—this covers businesses for injury, disease or damage to people they do not employ, e.g. visitors

Adana Construction, the defendant company, contracted to supply, deliver and install concrete and drainage works including the construction of concrete bases for tower cranes that were to facilitate the work. The first crane to be erected on one of the bases collapsed. The Health and Safety Executive concluded that the initial failure had been a failure of the connections between the concrete base and the piles on which it sat.

The defendant was insured under a public liability insurance policy including product liability cover for liability caused by any product, but not if the liability arose in connection with the product's failure to fulfil its intended function. Aspen Insurance, the claimant insurance company, brought proceedings the purpose of which was to deny liability to indemnify Adana for any claims which might be made against it arising out of the crane collapse.
The insurance company asked the High Court for a declaration that (among other things) the concrete base and/or its constituent parts was a product and that any liability would be caused by a product failing to fulfil its intended function.

The court ruled that the concrete base was not a ‘product’ and that in principle the defendant was entitled to be indemnified under the insurance policy.

Legaleze comment: this case illustrates the importance of identifying risks for which insurance is needed and understanding the distinction between the various types of cover, in particular general public liability (which is often provided in a general business employee and public liability policy). Although in this case, the insured company succeeded, the case shows that insurance companies will not hesitate to litigate if they feel they may be able to deny cover. In this case, the insurance company took the unusual step of taking the initiative and asking for a declaration that it was not liable to indemnify the insured, rather than defend proceedings brought by the insured. This might be seen to be an aggressive stance.

Buildings and content insurance: if you own freehold or leasehold property, you will require this type of cover. It is important to ensure that the correct value is covered. The full cost of rebuilding should be covered; consider also relocation costs. If you are a business tenant, you should check whether the landlord insures the building in which case you will only require contents insurance. Consider whether to take out "new for old" cover (if available) in order to be sure that the cover will provide sufficient funds in the event of a claim to buy replacement furniture and equipment.

Stock loss: loss of stock may occur through physical damage e.g. fire, water or contamination, or through theft whether by outsiders or by employees.

Vehicle insurance: road traffic law requires that all motor vehicles on the road are covered for third party liability. Businesses must consider whether comprehensive or fire and theft insurance should be taken out in addition. It is essential that insurance permitting use of vehicles for business purposes is taken out. In the case of cars and vans, insurance for social and domestic use is not appropriate. Special public hire, private hire or carriage of goods insurance cover will be required for bus/coach, taxi/private hire vehicle and haulage or courier companies as the case may be.

Product liability insurance: if your business manufactures or sells products whether to business or retail customers, product liability insurance should be considered. This cover pays out if your business is liable to pay compensation for damage or injury caused by a defect in the product.

News item:20/06/2013:
Concrete base not a ‘product’ as defined in a public liability insurance policy
[See above under Public liability]

Professional indemnity insurance: professional indemnity insurance may be required for certain regulated professions or regulated activities such as financial services. This cover will pay out in the event of advice or services provided being negligent.

Liability insurance, especially professional indemnity (‘PI’) cover, is usually provided in policies which provide cover on a "claims made" basis, i.e. the insured is given an indemnity against losses arising from claims made against him, as opposed to events occurring, during the policy period.

The advantage for insurers is that they are less exposed to unforeseen losses arising long after the period of cover has expired. However, the system may create considerable difficulties for an insured who becomes aware during the policy period of circumstances that may give rise to a claim in the future. The policy requires him to disclose the existence of any circumstances, but the disclosure may result in it becoming difficult or impossible to obtain renewal cover.

To mitigate this problem, the practice has grown up of including in "claims made" policies a term extending cover to losses arising from circumstances that may give rise to a claim in the future provided that they have been notified to the underwriters during the period of cover. However, an insured may find itself in a dilemma if it becomes aware of a large number of cases which might or might not give rise to a claim on the indemnity policy. In those circumstances, the insured may seek to make a ‘blanket’ notification of a large number of cases without being able to specify any particular problem.

What's new item:01/03/2013:
Solicitors’ firm win blanket notification case against insurersMcManus and Others v European Risk Insurance Company
[2013] EWHC 18 (Ch)
Slicitors McManus Seddon Runhams inherited over 5,000 files from a practice they acquired. It became apparent after receiving 17 claims arising from some of those files that more claims were likely. The firm made a general notification of all such files to its PI insurers which was rejected. The insurers subsequently refused to quote renewal cover, and the firm found it was impossible to obtain PI cover at an acceptable or any cost.

The firm applied to the High Court for a declaration that the rejection of the notification by its insurers was invalid, in the hope that would assist the firm in obtaining cover. The court held that the rejection was not valid, but declined to issue a declaration due to the practical difficulties in wording it in such a way as not to unfairly prejudice the insurers.

Directors and Officers liability insurance: provides cover for damages and legal costs in the event of claims against a director of a company arising out of his alleged acts or omissions in the course of his acting as a director. A director may in many circumstances incur personal liability for acts and omissions of their company if committed due to the neglect or default of the director.

Business Equipment insurance: high value or special equipment and tools should have the benefit of specialist cover.

Road haulage: goods in transit cover will be necessary in respect of loss or damage to goods carried.

Passenger transport: operators of buses and other public service vehicles, and taxi and private hire car operators should take out appropriate insurance cover in respect of passenger injury and possibly their property.

Business interruption insurance: provides cover for loss of profit arising from business interruption caused by building evacuation, power loss, computer failure etc. if your business is unable to trade.

Key person insurance: pays out a fixed amount in the event of loss of the services of specific named senior employees due to death, sickness or accident.

Life, accident, medical and permanent health insurance: provided a minimum number of members can be guaranteed, it may be appropriate to take out all or any of these types of insurance for the benefit of staff. Permanent health insurance provides a fixed amount to compensate an employee for loss of salary due to incapacity for work (for the causes stated in the policy) after a certain period (usually three or six months).

Business travel: where managers and employees travel frequently, business travel cover for the risks of delays, denial of boarding, lost luggage etc. may be necessary or desirable. Annual rather than per joourney cover will normally be more cost effective.
One company has developed a policy specifically for missed flights by Easyjet, and is reported [14/10/2012] as developing the plicy with other carriers.

Third Parties (Rights against Insurers) Act 1930 and 2010

A party (“an insured party”) who incurs a liability to another party (the “third party”) may have purchased an insurance policy to protect itself against the cost of that liability. If so, usually the insured party will make a claim under such a policy. Provided the insurer is satisfied that the claim is valid, the insurer will pay out the insurance proceeds. However, if the insured becomes insolvent before the third party is paid, then under general legal principles the insurance money will become an asset in the insolvent estate of the insured party. The third party would at best receive only part of the payment he or she would otherwise have been due, and the insurance money would be used to increase the amount paid to other creditors.

The Third Parties (Rights against Insurers) Act 1930 and the Third Parties (Rights against Insurers) Act (Northern Ireland) 1930 deal with this problem by transferring the insured party’s rights against the insurer to the third party. However, the 1930 Acts has a number of defects and insolvency law has changed considerably since 1930. The 1930 Acts can be expensive and time-consuming to use. Following a report by The Law Commisions, Parliament enacted the Third Parties (Rights against Insurers) Act 2010.

The 2010 Act updates the law to reflect changes in insolvency law since the 1930s. This includes providing for rights to be transferred to a third party where an insured is facing financial difficulties and enters into certain alternatives to insolvency such as voluntary procedures between the insured and the insured’s creditors..

The Act applies to voluntarily-incurred liabilities such as liabilities covered by legal expenses insurance, health insurance and car repair insurance. There was some doubt as to whether the 1930 Acts applied to such liabilities. The Act also addresses the issue of its application in cases with a cross-border element.

Multiple proceedings: Under the 1930 Acts, a third party cannot issue proceedings against an insurer without first establishing the existence and amount of the insured’s liability. This may involve expensive and time-consuming legal proceedings. The Act removes the need for multiple sets of proceedings by allowing the third party to issue proceedings directly against the insurer and resolves all issues (including the insured’s liability) within those proceedings. Under the Act the third party has the choice of using either the new method of single proceedings established by the Act, or the existing method of first establishing the liability of the insured before initiating proceedings against the insurer..

Defunct bodies: Under the 1930 Acts, if the insured is a defunct body which has been struck off the register of companies, the third party may first have to take proceedings to restore it to the register in order to be able to sue it. In removing the need for the third party to sue the insured, the Act also removes the need for such restoration..

Information rights: The Act improves the third party’s rights to information about the insurance policy, allowing the third party to obtain information at an early stage about the rights transferred to him or her in order to enable an informed decision to be taken about whether or not to commence or continue litigation.

Commencement: there has been a considerable delay in the implementation of the 2010 Act. However, the Third Parties (Rights against Insurers) Regulations 2016 aim to correct omissions from the 2010 Act so that it can be brought into force.